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The Labour Market

The Supply and Demand
for Labour

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The Labour Market

The labour market is an example of a factor
market
Supply of labour those people seeking
employment (employees)
Demand for labour from employers
A Derived Demand not wanted for its own sake
but for what it can contribute to production
Demand for labour related to productivity of labour
and the level of demand for the product
Elasticity of demand for labour related to
the elasticity of demand for the product

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The Labour Market

At higher wage
rates the demand
for labour will be
less than at lower
wage rates
Reason linked to
Marginal
Productivity
Theory

The demand for labour is highly dependent on the

productivity of the worker the more the worker
adds to revenue, the higher the demand.
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Marginal Revenue Productivity

Productivity refers to the amount produced
per worker per period of time
MRP = the addition to total revenue (TR) received
from the sale of an additional unit
of output
Worker instrumental in producing that output

Marginal Physical Product (MPP) the

addition to total product as a result of the
employment of one additional unit of labour

MRP = MPP x P

If a good sells for 1.00 and a worker produces

300 per day, the MRP of that unit
of labour is 300 per day

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The Labour Market

Marginal Productivity Theory
Wage Rate

The law of diminishing returns would

The
ARPthat
is the
revenue
product
suggest
as average
successive
units of
the
average
value added
total output
labour
are employed,
the to
addition
to
through
hiring
successive
workers.
total product will rise at first but thenThe
MRP
curve
the MRPthe
curve
at its
decline.
Theintersects
MRP represents
value
highest
point.
added to total output by successive
workers.

ARP

MRP = MPP x P
Number Employed
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The Labour Market

For the employer to be persuaded to
st
The
unitthe
of labour
adds
slightly
less
th
employ
additional
therefore,
the
Employing
In 21
a competitive
20workers,
labour
unit
ofmarket,
labour
the
costs
to
total
revenue
(6.70)
but
still
costs
wage
rate5.50
must
be
lower
toenough
compensate
the
individual
firm
firmper
is not
hour
bigbut
that labour
to
5.50
and
so
is
worth
employing.
There
for
the 7.00
fact that
the
extra
worker
adds
adds
influence
the
perwage
hour
rate.
to total
The
revenue
will
thus
be
an
incentive
the
firm to
less
to total
revenue
the
through
marginal
their
cost
work.
of labour
Itthan
is for
worth
is
a previous
horizontal
continue
to sell
employ
additional
units
of
one
and
to
extra
units,
the
firmrate.
must
employing
line
at the
that
existing
extra
market
unit of
wage
labour.
labour until
the price.
MRP = Wage rate
accept
a lower

Wage Rate ( per hour)

7.00
6.70

5.50

ARP

MCL

MRP = MPP x P
20

21

Number Employed
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The Labour Market

Wage Rate ( per hour)

There is an inverse relationship between

MRP
curve
represents
theThe
wage
rate
and therefore
the number
of people
the
demand
curve
for
labour
employed by the firm.
illustrating the derived demand
relationship.

10

DL
10

15

19

Number Employed
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The Labour Market

The Supply of Labour
The amount of people offering
their labour at different wage
rates.
Involves an opportunity cost work
v. leisure
Wage rate must be sufficient
to overcome the opportunity cost
of leisure
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The Labour Market

Income effect of a rise in wages:
As wages rise, people feel better off and therefore
may not feel a need to work as many hours

Substitution effect of a rise in wages:

As wages rise, the opportunity cost of leisure rises
(the cost of every extra hour taken in leisure rises).
As wages rise, the substitution effect may lead to
more hours being worked.

The net effect depends on the relative strength

of the income and substitution effects

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The Labour Market

The elasticity of supply of labour
depends upon:
Geographical mobility of labour:

The willingness of people to move

The cost and availability of housing
in different areas
The extent of social, cultural and family ties
The amount of information available to
workers about jobs in other areas
The cost of re-location
Anxiety of the idea of re-location

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The Labour Market

Occupational Mobility of
Labour:
Lack of information of available jobs
in other occupations
Extent and quality of remuneration
packages
Extent of skills and qualifications
to do the job
Anxiety at changing jobs
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The Labour Market

Wage Rate ( per hour)
10

SL

An inelastic supply of labour

a substantial rise in the wage rate
only brings forth a small increase
in the amount of people willing
and able to do such work.
The reason may be the number
with those particular skills and
qualifications, the time it takes to get
those skills, geographical immobility
etc.

Number of Hours Worked

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The Labour Market

Wage Rate ( per hour)

If the supply of labour is elastic, a

small rise in the wage rate is sufficient
to encourage more people to offer
their labour. Geographical and
occupational mobility are likely to be
high and there is likely to be many
substitutes.

SL
5.50
5

35

45

Number of Hours Worked

(per week)
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The Labour Market

Wage Rate ( per hour)

SL
A rise
the demand
for labour
The in
market
wage rate
for a
would
force occupation
up the wage rate as
particular
there
would will
be excess
therefore
occur atdemand
the
forintersection
labour.
of the demand

7.50

and supply of labour.

The wage rate will alter if
there is a shift in either or
both the demand and supply
of labour.

6.00

Excess Demand

DL
Q1

Q2

DL1
Number employed
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The Labour Market

Wage Rate ( per hour)

SL

An increase in the supply of

labour would lead to a fall
in the wage rate as there
would be an excess supply
of labour.

SL1

6.00
5.00

Excess Supply
DL
Q1

Q2

Number employed
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The Labour Market

Economic Rent The value of the wage
earned over and above that necessary
to keep a factor in its current
employment

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Economic Rent
Wage Rate ( per hour)

SL

The supply of labour curve

shows the relationship between
the wage rate and the number
of people offering their labour in
terms of the number of hours
worked.
At a wage rate of 6.00 per
hour, employees are willing to
offer Q1 hours. Some in the
market are not willing to work
for any less than that and some
would be willing to work for less
than 5.00.

6.00

Transfer
Earnings

The area under the supply

curve is referred to as the
Transfer Earnings of the
factor.

Q1

Number of hours worked

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Economic Rent
Wage Rate ( per hour)

SL

Some individuals would have been

Those
earn 6.00
peris hour

The
totalindividuals
value
of economic
rent
shown
prepared
to
work
Q2
hours
for
4.00
they
earn an
amount in excess
by
thetherefore
yellow shaded
triangle.
per
hour.
than they were prepared to offer their
services
this
is termed
Assumefor
that
6.00
per hourEconomic
is the
Rent.
current market wage rate for this
factor.

6.00

4.00

Economic
Rent
DL
Q2

Q1

Number of hours worked

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Wage Rate ( per hour)

Economic Rent
SL1
SL

W2

The total earnings of the factor is

thelower
wagethe
rate
x the hours
worked
The
elasticity
of supply
indicated
by
the
grey
rectangle.
of labour, the greater the economic
These
earnings
are in
made
up of
rent
think
about this
relation
an
element
of
transfer
earnings
to soccer stars!
and an element of economic rent.

Economic
W1 Rent

Total Factor Earnings

DL
Q1

Number of hours worked

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